11/25/2009 @ 2:40PM

How NRG Energy Wants to Revive Nuclear Industry

On a dry dock in Yokohama sits 250 tons of steel forgings waiting to be assembled into the core of a nuclear reactor. After it is built it will be shipped to Bay City, Tex., 90 miles southwest of Houston, where it will join two nuclear plants built a couple decades ago. The forgings would enclose the reactor within a new nuclear power plant, the first built in the U.S. since 1990. Power from the reactor would spew forth starting in 2016.

That is the vision of David Crane, chief executive of
NRG Energy
, the $7 billion (sales) Princeton, N.J. power company that wants to build the two-reactor project at a hoped-for price of $10 billion. Crane, 50, thinks he can pull the nuclear energy industry out of the mud and spark a renaissance with a time-honored strategy: use other people’s money.

He’s first seeking loan guarantees from the Department of Energy and the Japanese government (read: taxpayers) that would cover 80% of the project. That leaves $2 billion. Then there are a pair of partners–the city of San Antonio, which will end up with 40% of the equity, and another partner to be named by the end of this year, which will take another 20%. The plant’s builder,
Toshiba
, is taking a small chunk. In the end NRG will have a financing bill of $700 million over seven years. On its existing business (full or partial stakes in 48 power plants, including the existing nuke at its Texas site), NRG already has cash flow from operations of $1.3 billion through three quarters of 2009, so having to come up with $100 million a year looks manageable.

“It’s how to build a nuclear plant in this day and age,” says Steven Winn, who runs NRG’s nuclear venture. By that he means that construction delays, public opposition to nukes and uncertain energy prices undermine arm’s-length financing. If you want to build a nuke, you round up some sugar daddies.

Mark Cooper, a senior fellow for economic analysis at Vermont Law School’s Institute for Energy & the Environment, describes Crane’s plan this way: “He’s finding a series of suckers to take the risk off his hands.”

In the early part of the decade proponents talked breathlessly of a nuclear renaissance in the U.S. Natural gas prices were high, electricity demand was rising, and it seemed that carbon emissions would soon be either taxed or limited. In 2005 Congress passed an energy bill that provided loan guarantees for construction of new nukes on top of tax credits for power produced by the first few new reactors. Utilities fell over themselves planning new nuclear plants– nearly 40 proposals were drawn up.

Four years later the country is where it was a decade ago, at 104 operating nuclear plants (producing 20% of its electric energy). Natural gas prices crashed, making nukes look comparatively more expensive. Carbon remains untaxed and uncapped, and the recession ate into electricity demand, pushing the need for new plants further into the future. Credit markets also dried up, while the pool of government loan guarantees, $18.5 billion, was smaller than the industry hoped for, enough probably for only three plants.

Now, while 17 nuclear projects are still active, only a half-dozen plant proposals are moving at full speed, led by the four projects that are finalists for federal loan guarantees:
Southern Co.’s
Plant Vogtle project in eastern Georgia; the South Carolina utility
Scana’s
V.C. Summer Nuclear Station project near Jenkinsville, S.C.;
Constellation Energy
‘s Calvert Cliffs project in Lusby, Md.; and NRG’s South Texas Project. The feds are supposed to announce winners in a few months.

If you really, really want to keep carbon out of the air, it makes sense to build nukes. Solar is still extremely expensive, and wind can get you only so far. It would take a wind farm of 1.2 million acres, bigger than Rhode Island, to produce the electricity that would be put out by the four South Texas Project reactors on its 12,000-acre site.

“We’re not going to be able to live without nuclear and coal with carbon capture if you are looking for an economically optimum future,” says Revis James, who models future power needs for the Electric Power Research Institute. “We’re going to have to build 20 more nuclear units, and we’ll need to replace the ones we have. And if carbon capture and storage runs into technical problems, we’ll need more.”

Yet, according to James Hempstead, a nuclear analyst at
Moody’s
, every company that is even thinking about building a new nuclear plant faces the possibility of a credit downgrade. That’s why Crane’s first step was to Washington, D.C. “It’s a very short discussion if the federal government doesn’t certify the loan guarantee,” admits Crane. “We’d stand down within the next few months.” The guarantee would cut two to three percentage points off NRG’s $3.2 billion portion of the 30-year loan, a savings of $2 billion over the life of the loan.

Crane is hedging his bets still other ways. NRG sells power into unregulated markets, so it doesn’t have a pool of captive ratepayers (as Southern and Scana do) who will pay for construction or cost overruns. So rather than build one of the newest nuclear plant designs, NRG chose an older design called the ABWR, which stands for advanced boiling water reactor. The design has been built four times in Japan, all on time and on budget.

Because Toshiba has experience with the reactor, NRG says it will be able to sign a fixed-price contract with Toshiba for construction and also get Toshiba to chip in 5% of the equity. NRG expects to hammer out that fixed price, probably somewhere between $10 billion and $12 billion, by January.

While the ABWR could easily still face regulatory delays and construction problems as it tries to satisfy U.S. standards, it seems to be a safer choice than designs chosen by NRG’s competitors in the federal loan guarantee race. Constellation Energy, working through a joint venture with the $90 billion (sales) French utility Electricité de France, plans to build a plant designed by
Areva
, the French nuclear company. Areva’s style of plant is now being built in Finland and facing huge construction delays and cost overruns. Southern and Scana are each building a plant called the AP1000, designed by Toshiba’s Westinghouse unit. In October the Nuclear Regulatory Commission announced that parts of the plant would have to be redesigned because of concerns it wouldn’t survive a severe shock from outside the plant, like a hurricane.

Crane is taking a safer, though potentially costly, approach to pricing. He wants to sell all the plant’s power before he puts a shovel in the ground. He says he has handshake agreements with municipal and cooperative utilities and private companies to do just that. Why would anyone contract for new nuclear power in 2016 when gas prices are low in 2009 and new gas seems to be found every year? Crane says customers in Texas who got burned by volatile natural gas prices over the past ten years are desperate to diversify their power sources. Crane acknowledges his shareholders could be sacrificing upside. If economic activity picks up, natural gas prices are high and carbon carries a price, he would be able to sell his juice for much higher prices than he’s negotiating for now.

Of course, NRG still may have a nice cushion, courtesy, again, of the feds. The first 6 gigawatts of new nukes in the U.S. get a bonus: a tax credit of 1.8 cents per kilowatt-hour for the first eight years of production, to a maximum of $125 million a year. Assuming the first of NRG’s twin plants (each 1.35 gigawatts) makes the cut, that’s $1 billion.

If the market is snubbing nukes, why should taxpayers step in? To proponents like senators John McCain, Lindsay Graham, Lamar Alexander and John Kerry, loan guarantees cost the government nothing if the loans are repaid, and so projects like this one are a cheap way to get carbon-free power.

Guarantees don’t cost anything? You might recall that kind of argument back when the federal government was, directly and indirectly, guaranteeing home mortgage debt.

NUCLEAR OPTIONS

The NRC has received 17 applications for 35 gigawatts’ worth of new nuclear plants, equivalent to 35 big coal plants. The finalists for federal loan guarantees: